by William Bristow*

Do Section 10(b) the Exchange Act and SEC Rule 10b-5 apply to securities transactions entered into in the United States where the security is not sold on a national exchange and is valued based on the price of a different security not sold within the United States? In this Contribution, William Bristow (’21) discusses the implications of Morrison v. National Australia Bank Ltd., where the Supreme Court held that the Exchange Act does not apply extraterritorially and thus only applies to domestic securities transactions. This Contribution argues that Morrison’s “transactional test” establishes a sufficient condition for the application of the Exchange Act, not a necessary condition.

Today, more than ever, securities trading is a global industry. Accordingly, American courts are increasingly called upon to determine when section 10(b) of the Securities Exchange Act of 1934, the Act’s general anti-fraud provision, applies to transactions involving foreign elements.2 In Morrison v. National Australia Bank Ltd.,3 the Supreme Court held that Section 10(b) only applies to domestic securities transactions because the Act does not apply extraterritorially. However, Morrison did not explain whether the existence of a domestic securities transaction is a sufficient requirement for the application of Section 10(b) or merely a necessary requirement. Since Morrison, a circuit split has emerged, with the Second Circuit holding that a domestic transaction is necessary but not sufficient to permit application of Section 10(b), and the Ninth Circuit holding that a domestic transaction is sufficient in itself to permit application of Section 10(b).

This article will argue that the existence of a domestic securities transaction is sufficient by itself to permit application of Section 10(b) for several reasons. First, this is consistent with the most straightforward reading of Morrison. Second, a contrary standard would be incompatible with Morrison’s aims of predictability and uniformity. Third, Morrison resolved potential comity concerns, and the law of personal jurisdiction may serve to protect foreign corporation from excessive liability.

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During the New Deal, Congress passed the Securities Act of 1933, which “regulates initial distributions of securities,” and the Securities Exchange Act of 1934, which “for the most part regulates post-distribution trading,” to create a regulatory scheme for the securities industry.4 Section 10(b) is the “general antifraud provision” of the 1934 Act.5 It prohibits, “in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, or any securities-based swap agreement,” the use or employment of “any manipulative or deceptive device or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.”6 Section 10(b) is enforced by both private parties and the government under Securities and Exchange Commission (“SEC”) Rule 10b-5, which states:

It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,

(a) To employ any device, scheme, or artifice to defraud,

(b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.7

The Supreme Court has held that Section 10(b) and Rule 10b-5 imply a private right of action and thus may be enforced by both private plaintiffs and by the SEC, although only the SEC may prosecute claims against secondary violators, otherwise known as “aiders and abettors.”8

In Morrison v. National Australia Bank Ltd., the Supreme Court held that Section 10(b) only applies to domestic securities transactions because the Act does not apply extraterritorially.9 The Court explained that under the “presumption against extraterritoriality,” a canon of construction, a statute does not apply extraterritorially unless “Congress clearly expressed” an “affirmative intention” to that effect.10 When a statute does not apply extraterritorially, it may only be applied to domestic applications of the statute’s “focus.”11 Writing for the majority, Justice Scalia explained that Section 10(b)’s “focus” is “not upon the place where the deception originated, but upon purchases and sales of securities in the United States.”12 Thus, Section 10(b) and Rule 10b-5 only apply to domestic securities transactions and may not apply to securities transactions occurring outside of the United States.

In Absolute Activist Value Master Fund Ltd. v. Ficeto, the Second Circuit held that a securities transaction is “domestic” if “irrevocable liability is incurred or title passes within the United States.”13 The Supreme Court has not yet articulated a precise definition for “domestic transaction,” but the courts of appeals have generally agreed upon the definition provided by the Second Circuit.14 Under that interpretation, the law is fairly clear with respect to “traditional” securities, such as a corporation’s common stock sold on a national exchange. If a share of a corporation is sold and irrevocable liability is incurred or title passes within the United States, the purchaser may have a Section 10(b) claim assuming that all other elements can be proved.

In Morrison, the Court did not clearly state whether the domestic transaction requirement was a necessary condition or a sufficient condition. Thus, a circuit split has developed between the Second Circuit and Ninth Circuit as to whether the existence of a domestic securities transaction is sufficient by itself to permit application of Section 10(b),15 or whether a court may decline to apply Section 10(b) to such a transaction if it is “so predominantly foreign as to be impermissibly extraterritorial.”16 Thus, the effect of Morrison is uncertain with respect to domestic financial instruments that are valued based on the price of a security that is not itself sold in the United States.17

In Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE, the Second Circuit held that the existence of a domestic securities transaction is a necessary condition for the application of Section 10(b), but that it is not sufficient to permit application of Section 10(b) by itself. Specifically, the court held that Section 10(b) did not apply to a claim arising out of a domestic transaction because it was “so predominantly foreign as to be impermissibly extraterritorial.”18 Parkcentral involved “securities-based swap agreements,” where each “swap” was a “private contract [exchanging] cash flows that depend on the price of a reference security.”19 The Second Circuit held that the existence of a domestic securities transaction is not sufficient in itself because “the [Morrison] Court did not say that such a transaction was sufficient.”20 The court believed that to hold otherwise “would inevitably place § 10(b) in conflict with the regulatory laws of other nations.”21 But this conclusion is difficult to reconcile with the “clear test” adopted by the Court in Morrison.22

In contrast, in Stoyas v. Toshiba Corp., the Ninth Circuit flatly rejected Parkcentral, holding that the existence of a domestic securities transaction is sufficient in itself for the application of Section 10(b).23 Stoyas involved American Depositary Receipts (“ADRs”), which “are negotiable certificates issued by a United States depositary institution, typically banks, [that] represent a beneficial interest in, but not legal title of, a specified number of shares of a non-United States company. The depositary institution itself maintains custody over the foreign company’s shares.”24

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The Ninth Circuit correctly rejected Parkcentral because it is contradictory to both the text of Morrison and Section 10(b), as well as to the intent of Morrison. Morrison did not specifically address whether the existence of a domestic securities transaction was a necessary requirement or a sufficient requirement for the application of Section 10(b). However, it did explain that the “focus” of Section 10(b) is on the location of a particular transaction and not on the location of the allegedly false statements or misrepresentations.25 Moreover, the text of the Exchange Act broadly applies to the sale of “any security registered on a national securities exchange or any security not so registered” and is facially incompatible with Parkcentral’s holding.26 Moreover, subsequent case law suggests that, under the presumption against extraterritoriality more broadly, a domestic application of a statute’s “focus” is both a necessary and sufficient condition.27

Morrison’s holding was an attempt to create uniformity and predictability with a clear rule.28 Parkcentral’s standard is to the contrary.29 For decades prior to Morrison, the Second Circuit used the “conduct and effects” test to determine whether a statute could apply extraterritorially.30 Generally, the test asked: “whether the wrongful conduct had a substantial effect in the United States or upon United States citizens,” or “whether the wrongful conduct occurred in the United States.”31 Morrison rejected this regime, criticizing it as “judicial-speculation-made-law,”32 and as “a collection of tests for divining what Congress would have wanted, complex in formulation and unpredictable in application.”33 In contrast, Justice Scalia explained that the new “transactional test” would serve as a “clear test” in the future.34 However, under Parkcentral, a court must engage in a rigorous, fact-intensive inquiry to determine whether a claim is “impermissibly extraterritorial.”35

In Giunta v. Dingman, the Second Circuit analyzed a securities transaction with a set of both domestic and foreign contacts. The court held that Section 10(b) could apply to a domestic transaction with an entirely foreign business because the complaint nonetheless alleged “substantial domestic contacts” related to the transaction.36 Dingman suggests that the Parkcentral test properly focuses on the transaction, rather that the nationality of the parties or the location of the alleged false or misleading statement.37 However, Dingman also demonstrates that Parkcentral will necessitate courts to decide many cases in order to clarify the line between predominantly domestic and “predominantly foreign as to be impermissibly extraterritorial,”38 and thus is inconsistent with Morrison.

In the interim, this uncertainty will make it onerous for corporations to structure their affairs. For example, imagine the situation of a corporation’s general counsel who must determine the scope of her client’s potential § 10(b) liability. Under Toshiba, she may reasonably forecast liability by looking to transaction locations. While there may be some uncertainty, she can generally provide reliable advice. In contrast, under Parkcentral, she cannot forecast liability without expending time and money investigating the facts of each individual transaction. Even then, she cannot provide her client with any degree of certainty in any transaction with any foreign elements because she cannot predict whether those elements will render a claim “predominantly foreign.”39

Concurring in Parkcentral, Judge Leval suggested that the analysis of whether “a particular set of transnational facts would be impermissibly extraterritorial has much in common with the choice-of-law question that arises when a court must determine which state or nation’s law most appropriately governs a case involving interstate or transnational facts.”40 Referring to the mid-twentieth century revolution in the field of conflict-of-laws, Judge Leval went on to state that:

Over the last half-century, at least in the absence of a binding contractual selection by the parties, courts have overwhelmingly abandoned bright-line tests in favor of more subtle and flexible inquiries for such questions because their complexity does not lend itself to reliable analysis by a bright-line test. [collecting cases].41

However, it seems unlikely that Morrison’s criticism of “judicial-speculation-made-law,”42 and its acknowledgement that its holding would provide a “clear test,”43 could be understood as anything other than a call for a bright-line rule.

The Parkcentral court’s comity concern that holding to the contrary “would inevitably place § 10(b) in conflict with the regulatory laws of other nations”44 is probably overstated. A plaintiff who sues under Sections 10(b) and Rule 10b-5 must also prove all other elements of their claim. Perhaps most importantly, in order for a misrepresentation or other prohibited conduct to give rise to liability, there must be “a connection between the [conduct] and the purchase or sale of a security.”45 This could be difficult to prove in a case involving the kind of financial instruments that may have little to do with the associated company, such as an unsponsored ADR.46 If a plaintiff alleges that a foreign corporation made a misrepresentation in the sale of an unsponsored ADR, they may be unable to demonstrate that the corporation’s misconduct was connected to the “purchase or sale of a security” because the corporation may have had little connection with the ADR in the first place.47 On the other hand, if a corporation is involved in the creation of an ADR, either because it is sponsored or because they are sufficiently connected in some way, and engages in conduct otherwise sufficient to violate the statute, then comity issues are unlikely. This is because Section 10(b) can only apply to the ADRs under Morrison and a foreign regulatory regime will be free to regulate the corporation with respect to any securities issued in that country.

Furthermore, Parkcentral’s comity justification is possibly foreclosed by Morrison. Comity considerations tend to belong to the related body of law known as “jurisdiction to prescribe”—the authority of a nation-state to extend its law to particular conduct, persons, property, or offenses.48 Adding an “impermissibly extraterritorial” analysis might be improper because Morrison potentially resolved comity concerns by concluding that Section 10(b) only applies to domestic transactions,49 and because when “combining other comity limitations with the presumption against extraterritoriality, a court should take care not to double-count the legitimate interests of other states.”50 In other words, states should consider comity concerns but need not accommodate them twice. Regardless, a judicially created standard to satisfy comity interests, on top of the presumption against extraterritoriality, is emblematic of the judicial methodology that the Court took to task in Morrison.51

Finally, the law of personal jurisdiction may protect foreign corporations from excessive liability in the context of cross-border securities trading. Under the Fourteenth Amendment, a court cannot render a judgment without personal jurisdiction over the defendant.52 A forum has specific jurisdiction when “the litigation results from alleged injuries that ‘arise out of or relate to’” the defendant’s forum-directed activities.53 Specific jurisdiction cannot be created by the “unilateral activity” of a third party.54 Exercise of specific jurisdiction must be reasonable and “burdens placed upon one who must defend oneself in a foreign legal system . . . have significant weight in assessing . . . reasonableness.”55 Alternatively, a forum has general jurisdiction over a corporate defendant “only when [its] affiliations with the [forum] are so constant and pervasive ‘as to render [it] essentially at home.’”56 Usually these locations will only be a corporate defendant’s “place of incorporation [or] principal place of business . . . .”57 Morrison was decided during the era of expansive “doing business” general jurisdiction which the Court has since put to a close.58

American courts may lack specific jurisdiction when a foreign corporation was unaware of the domestic transaction because putative jurisdiction would have been the result of the plaintiff’s “unilateral activity,”59 and because the exercise of jurisdiction may be unreasonable.60 Courts will likely lack general jurisdiction because it is more difficult to prove that foreign defendants are “at home” in an American forum.61

Thus, foreign corporations are protected from being unfairly dragooned into an American court by the creation of a security by a third party because Morrison instructs that the only relevant domestic contacts are those with respect to the securities transaction,62 substantive securities law requires that the corporation be connected with the purchase or sale,63 and personal jurisdiction law bars jurisdiction based on the unilateral act of a third party64 or based solely on “doing business” in the United States.65

Under a straightforward reading of Morrison, a domestic securities transaction is sufficient to permit application of Section 10(b) and thus Rule 10b-5. This reading of Morrison is buttressed by its aims of predictability and uniformity. Finally, neither comity concerns nor fairness concerns justify an additional level of extraterritoriality analysis in Section 10(b) cases. Congress can amend Section 10(b) if it so chooses, but courts should not do Congress’ job for it.

* William Bristow is a J.D. Candidate (2021) at New York University School of Law. This piece is a commentary on the 2020 problem at the Kaufman Securities Law Moot Court Competition in New York, NY, hosted by Fordham University School of Law. The issue in the problem was whether a domestic securities transaction is itself sufficient to permissibly apply Section 10(b) of the Securities Exchange Act of 1934. 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 the arguments made by the team at the Kaufman Securities Law Moot Court Competition.

2. See 15 U.S.C. § 78j(b) (“Section 10(b)”).

3. 561 U.S. 247, 265 (2010).

4. Cent. Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 170–71 (1994).

5. Id. at 171. See also 15 U.S.C. § 78j(b).

6. 15 U.S.C. § 78j(b).

7. 17 CFR § 240.10b-5 (“Rule 10b-5”).

8. Cent. Bank of Denver, 511 U.S. at 191 (private plaintiffs cannot bring aiding and abetting claims); 15 U.S.C. § 78t(e) (providing that the SEC can bring aiding and abetting claims).

9. 561 U.S. 247, 265 (2010).

10. Morrison, 561 U.S. at 255 (citing EEOC v. Arabian American Oil Co., 499 U.S. 244 (1991) (“Aramco”) (internal quotations omitted)).

11. Id. at 266–67 (discussing the “the ‘focus’ of congressional concern” (citing Aramco, 499 U.S. at 255)).

12. Id. at 266.

13. 677 F.3d 60, 67 (2d Cir. 2012).

14. See Stoyas v. Toshiba Corp., 896 F.3d 933, 949 (9th Cir. 2018) (adopting Absolute Activist test); United States v. Georgiou, 777 F.3d 125, 136–37 (3d Cir. 2015) (same).

15. Stoyas, 896 F.3d at 949–50 (domestic transaction is sufficient for Section 10(b)).

16. Parkcentral Global HUB Ltd. v. Porsche Automobile Holdings SE, 763 F.3d 198, 216 (2d Cir. 2014) (per curiam).

17. For example, “securities-based swap agreements,” see infra note 19 and accompanying text, and “American Depositary Receipts,” see infra note 23 and accompanying text.

18. Parkcentral, 763 F.3d at 216.

19. Id. at 205 (internal quotations omitted).

20. Id. at 215 (emphasis in original).

21. Id.

22. 561 U.S. at 269.

23. Stoyas, 896 F.3d at 949–50.

24. Id. at 940.

25. Morrison, 561 U.S. at 266 (“[T]he focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.” (emphasis added)).

26. See Stoyas, 896 F.3d at 950 (explaining that “Parkcentral . . . carves-out ‘predominantly foreign’ securities fraud claims from Section 10(b)’s ambit, disregarding Section 10(b)’s text,” and noting that Section 10(b) refers to “any security” (emphasis in original)).

27. See RJR Nabisco, Inc. v. European Cmty., 136 S. Ct. 2090, 2101 (2016) (discussing whether the Racketeer Influenced and Corrupt Organization Act applies extraterritorially and stating that where the “conduct relevant to the statute’s focus occurred in the United States, then the case involves a permissible domestic application even if other conduct occurred abroad”).

28. See Morrison, 561 U.S. at 255, 261 (rejecting the Second Circuit’s “conduct and effects” test in favor of a rigid “presumption against extraterritoriality”).

29. Compare Morrison, 561 U.S. at 261 (“Rather than guess anew in each case, we apply the presumption [against extraterritoriality] in all cases, preserving a stable background against which Congress can legislate with predictable effects.”), and Stoyas, 896 F.3d at 950 (Parkcentral provides “an open-ended, under-defined multi-factor test . . . .”), with Parkcentral, 763 F.3d at 217 (“We do not purport to proffer a test that will reliably determine when a particular invocation of § 10(b) will be deemed appropriately domestic or impermissibly extraterritorial . . . . Neither do we see anything in Morrison that requires us to adopt a ‘bright-line’ test. . . .”).

30. Morrison, 561 U.S. at 257.

31. Id. at 257 (internal quotations omitted) (citing SEC v. Berger, 322 F.3d 187, 192 (2d Cir. 2003)).

32. Id. at 261.

33 Id. at 256; see also Stephen J. Choi & Linda J. Silberman, Transnational Litigation and Global Securities Class-Action Lawsuits, 2009 Wis. L. Rev. 465, 467 (2009) (“Unfortunately, much uncertainty surrounds the consideration of extraterritorial issues within securities class-action lawsuits. The individual doctrines applied within the courts–such as the conduct and effects tests–are often ambiguous and difficult to predict.”) (cited in Morrison, 561 U.S. at 260).

34. 561 U.S. at 269–70.

35. See 763 F.3d at 216.

36. 893 F.3d 73, 82–83 (2d Cir. 2018). In Dingman, the defendant was “a permanent resident of the Bahamas,” the corporate “entities were incorporated in the Bahamas by a Bahamian lawyer,” the business “involved development and operation of restaurants, bars, and hotels in the Bahamas,” and the “witnesses and the books and records [were] in the Bahamas.” Id. Nonetheless, § 10(b) applied because of “substantial domestic contacts” related to the underlying business agreement. Id. Specifically, “[t]he [a]greement was entered into in New York,” the defendant “continued to press . . . for further investments in New York,” the defendants “were both U.S. citizens[,] the wire transfers originated from New York . . . and the confirmation letters were sent to New York.” Id. “The only foreign component present in the formation of the Agreement was the eventual registration of the shares ‘with the appropriate Bahamian authorities.’” Id.

37. See supra note 35 and accompanying text; Morrison, 561 U.S. at 266 (“[T]he focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.”).

38. Parkcentral, 763 F.3d at 216.

39. See id.

40. Parkcentral, 763 F.3d at 220 (Leval, J., concurring).

41. Id.

42. Morrison, 561 U.S. at 261.

43. Id. at 269.

44. Parkcentral, 763 F.3d at 215 (“[A] rule making the statute applicable whenever the plaintiff’s suit is predicated on a domestic transaction, regardless of the foreignness of the facts constituting the defendant’s alleged violation, would seriously undermine Morrison’s insistence that § 10(b) has no extraterritorial application. It would require courts to apply the statute to wholly foreign activity clearly subject to regulation by foreign authorities solely because a plaintiff in the United States made a domestic transaction, even if the foreign defendants were completely unaware of it. Such a rule would inevitably place § 10(b) in conflict with the regulatory laws of other nations.”).

45. Stoneridge Inv. Partners, LLC v. Sci.-Atlanta, 552 U.S. 148, 157 (2008).

46. ADRs are referred to as “sponsored” or “unsponsored” depending on whether they are created with or without the cooperation of the non-United States Company. See Securities and Exchange Commission, Investor Bulletin: American Depositary Receipts 1 (August 2012), (last visited October 30, 2020).

47. See Stoyas, 896 F.3d at 950–52 (remanding to the district court to determine Toshiba’s connection to certain ADRs because the plaintiffs had not pleaded a sufficient connection). But see Stoyas v. Toshiba Corp., 424 F. Supp. 3d 821, 828 (C.D. Cal. 2020) (On remand, the “Plaintiffs . . . sufficiently alleged the ‘in connection with’ element.”).

48. See Restatement (Fourth) of the Foreign Relations Law of the United States §§ 402–05 (distinguishing jurisdiction to prescribe from the presumption against extraterritoriality).

49. See Morrison, 561 U.S. at 269–70 (explaining that its test resolves concerns regarding “interference with foreign securities regulation”).

50. Restatement, supra note 40 at § 405, cmt. c.

51. Compare Morrison, 561 U.S. at 261 (rejecting “judicial-speculation-made-law”) with Parkcentral, 763 F.3d at 216 (“[A]pplication of § 10(b) . . . would so obviously implicate the incompatibility of U.S. and foreign laws that Congress could not have intended it sub silentio.”).

52. E.g., Bristol-Myers Squibb Co. v. Superior Ct., 137 S. Ct. 1773, 1779 (2017); Pennoyer v. Neff, 95 U.S. 714, 733 (1878); see also U.S. Const. amend. XIV, § 1 (Due Process Clause).

53. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472 (1985) (internal citations omitted).

54. Hanson v. Denckla, 357 U.S. 235, 253 (1958).

55. Asahi Metal Indus. Co. v. Superior Ct., 480 U.S. 102, 113–14 (1987).

56. Daimler AG v. Bauman, 571 U.S. 117, 122 (2014) (citing Goodyear Dunlop Tires Operations, S.A. v. Brown, 564 U.S. 915, 919 (2011)).

57. Daimler, 571 U.S. at 137.

58. See generally, Tanya J. Monestier, Where Is Home Depot “At Home”?: Daimler v. Bauman and the End of Doing Business Jurisdiction, 66 Hastings L.J. 233 (2014) (overviewing change).

59. See Denckla, 357 U.S. at 253.

60. See Asahi, 480 U.S. at 114.

61. See Daimler, 571 U.S. at 137.

62. See Morrison, 561 U.S. at 266 (“[T]he focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States.”).

63. See Stoneridge Inv. Partners, 552 U.S. at 157 (2008).

64. See Denckla, 357 U.S. at 253 (1958).

65. See Daimler, 571 U.S. at 136–39, 139, n.20 (holding that “doing business” without “continuous and systematic contacts,” is insufficient for general or “all-purpose” jurisdiction).