Volume 59

The Government's Power to Bring Transnational Securities Fraudsters to Account: Dodd-Frank Rendered Morrison Irrelevant

by J.R. O'Sullivan

The real engine of the Supreme Court’s blockbuster decision in Morrison v. National Australia Bank Ltd. was not the Court’s much-discussed invigorated presumption against extraterritoriality. On the ground, what matters to investors, companies, and judges is the oft-ignored second Morrison ruling: the creation of a “focus” analysis for separating actionable “domestic” section 10(b) claims from foreclosed “extraterritorial” suits. Applying this analysis, the Court determined that the site of the transaction at issue determines whether a section 10(b) case can proceed: section 10(b) only covers “transactions in securities listed on [U.S.] domestic exchanges” or “domestic transactions in other securities.” 

Morrison’s second ruling has attracted relatively little scholarly attention. This Article’s first contribution, then, is to start a conversation regarding the bona fides of the Court’s focus analysis and its resultant transactions test for securities claims. It plumbs the voluminous case law in which courts have struggled to apply the transactions test in transnational securities fraud cases. This review demonstrates that the Morrison transactions test is not capable of meeting the Court’s aims in Morrison: it yields arbitrary results, and in many cases, it is incapable of stable and predictable application. Thus, it does not further congressional objectives in securities regulation, nor does it efficiently allocate cases to the jurisdiction with the greatest sovereign interest. 

This Article’s second contribution is to proffer a novel framing and analysis to show that Congress displaced the Morrison test in government-initiated cases under the Dodd-Frank Wall Street Reform and Consumer Protection Act. Just days after Morrison was decided, Congress passed Dodd-Frank, in which it amended the jurisdictional authorization for SEC- and DOJ-initiated section 10 (b) cases to incorporate a conduct-and-effects test that courts of appeals had employed for decades but which the Morrison Court spurned in favor of its flawed transactions test. The Morrison Court had ruled that its transactions test limited the scope of section 10(b) itself and was not a question of subject-matter jurisdiction, as courts of appeals had long held. Because Congress chose to amend the jurisdiction section rather than section 10(b), the overwhelming majority of commentators believe that Congress’s effort to replace the transactions test with the traditional conduct-and-effects test in government-initiated cases might be ineffective. The question of whether the SEC and DOJ can fill the regulatory gap left by Morrison’s limitations on private enforcement is critically important in light of the volume of transnational securities trading and concomitant fraud. 

This Article demonstrates that the scholarly consensus is wrong. It proposes a more appropriate framing—that is, a focus on the amended jurisdictional statute rather than Morrison. This framing reveals that Congress wished to endorse the lower courts’ approach prior to Morrison both by reinstating the conduct-and- effects test for extraterritoriality in government-initiated cases and by codifying the treatment of extraterritoriality as a jurisdictional question. The posited analysis, unlike much of what is currently being aired in courtrooms and law reviews, disentangles this knotty question in a way that is consistent with relevant principles of statutory construction. This Article concludes that Congress successfully replaced the transactions test with a jurisdictional conduct-and-effects test in government-initiated section 10(b) actions. 

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