Corporate Governance

Remember the old Westerns where the bad guys raced to the border and got away if they made it across?  With Morrision v. National Australia Bank, the Supreme Court today gave a huge gift to corporate wrongdoers.  In a ruling of breathtaking scope, the Court invoked a ?presumption against extraterritorial application? and limited Section 10(b) of the Exchange Act to purchases or sales of a security listed on an American stock exchange and the purchase or sale of any other security that takes place in the United States.  (Opinion at 19 n.10, 24).  The most notable beneficiaries of this Go Free Pass could be recent malefactors BP and Toyota, despite the fact that their misconduct occurred in the US.

The breadth of the Morrison decision, and its abandonment of any conduct or effects test, is disturbing. Clearly, foreign investors who purchase on foreign exchanges are precluded from recovering in the US under section 10b. How does this affect the ability of US investors who purchase shares on foreign exchanges to recover under section 10b? Arguably, the ?purchase or sale? occurred when the order was placed with a US broker. However, defendants will undoubtedly argue that transaction did not occur until it ?crossed? the foreign exchange.

The decision might have the unintended consequence of increasing order flow to US broker-dealers if institutional investors adopt a ?best execution? practice that favors buying dual-listed securities on US exchanges, in order to insure protection against securities fraud.