A U.S. Supreme Court ruling last month may translate into billions of dollars in litigation savings for foreign-based companies including Vivendi SA, Infineon Technologies AG, Societe Generale and BP Plc.
The June 24 decision, overshadowed by rulings the same day in the corporate corruption cases of Jeffrey Skilling and Conrad Black, said U.S. securities laws don’t apply overseas. The justices unanimously threw out a fraud lawsuit by three Australian shareholders against Melbourne-based National Australia Bank Ltd.
Companies are already benefiting. Lawyers suing Societe Generale and Infineon agreed to scale back their lawsuits. A federal judge in New York yesterday trimmed a suit against Credit Suisse Group AG. And a judge this week heard Vivendi’s bid to throw out most of a jury verdict in an investor suit that seeks $9 billion.
“It’s hard to imagine a case that will have as much direct and immediate impact on large existing litigations,” said George Conway, a lawyer at Wachtell Lipton Rosen & Katz who represented National Australia at the high court. “It wipes out an entire species of class-action litigation.”
The ruling, Morrison v. National Australia Bank, said federal securities laws don’t let non-Americans sue in U.S. courts over shares of a foreign company that are listed only on an overseas exchange.
The Securities and Exchange Commission and Justice Department had urged a more nuanced approach that would have permitted some suits. The government proposed allowing lawsuits when the alleged fraud has a significant tie to the U.S. and when the fraud directly caused the shareholder’s losses.
Writing for the court, Justice Antonin Scalia said that reasoning was inconsistent with the text of the 1934 Securities Exchange Act, given that courts start from the presumption that laws don’t apply overseas.
“The 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,” Scalia wrote.
The dispute centered on a class of cases known colloquially as foreign-cubed or F-cubed suits because they involve foreign corporations, shareholders and exchanges.
Vivendi may prove to be one of the biggest winners. A jury in January found that the Paris-based company misled investors 57 times from 2000 to 2002.
American Depositary Receipts
Vivendi said in a court filing this month that the Morrison ruling will eliminate the claims of anyone who bought shares on a foreign exchange, including Americans. That would leave only investors who bought American depositary receipts -- bank-issued securities that trade in the U.S. and are tied to the value of ordinary shares. ADRs represented from 7.9 percent to 10.1 percent of the company’s securities at the time, Vivendi said.
The Morrison decision “will likely reduce potential damages by at least 80 percent and may reduce them significantly more,” Vivendi argued.
The lawyers suing Vivendi say the Morrison decision doesn’t bar lawsuits by American buyers of stock on foreign exchanges -- a class of investors that in Vivendi’s case held about a quarter of the company’s shares. The lawyers say language in Scalia’s opinion suggests the justices were considering only the viability of claims by foreign plaintiffs.
A judge considering a suit against Credit Suisse yesterday rejected that interpretation, barring claims by American purchasers of the Zurich-based company on the Swiss stock exchange.
“This court is not convinced that the Supreme Court designed Morrison to be squeezed, as in spandex, only into the factual straitjacket of its holding,” U.S. District Judge Victor Marrero wrote.
A judge in Los Angeles previously reached the same conclusion on a temporary basis in a case involving Toyota Motor Corp.
Similar reasoning would limit investor suits against London-based BP over the Gulf of Mexico oil spill, though one of the lawyers pressing the suits, Stanley Chesley of Waite Schneider Bayless & Chesley, said BP is distinguishable from National Australia because of the oil company’s deep U.S. ties.
“They clearly are here and should be under the laws of the United States of America,” Chesley said.
Daren Beaudo, a BP spokesman, said the company wouldn’t comment on the issue. BP said yesterday that the SEC is looking into matters related to the spill.
The Morrison ruling also may affect F-cubed cases against Alstom SA and European Aeronautic Defense & Space Co.
The impact of the high court ruling on private transactions, including derivatives, may prove complicated, according to Richard Painter, a securities law professor at the University of Minnesota Law School in Minneapolis.
“You could have one party in Paris, one party in New York and the derivative security was designed by Goldman Sachs in London,” Painter said. “Where did the transaction take place?”
In one pending case involving derivatives, hedge funds suing Porsche SE redrafted their complaint in response to the Morrison decision, focusing on swap agreements that allegedly took place in the U.S. The funds say Porsche secretly cornered the market in Volkswagen AG shares, costing short-sellers more than $1 billion.
The Morrison decision might also restrict the SEC’s authority, depending how courts interpret a provision in the new Wall Street regulation law. The provision aims to partially overturn Morrison, letting the SEC police fraud affecting foreign investors if it stems from domestic wrongdoing.
Conway, the National Australia Bank lawyer, said the new law was improperly drafted, targeting the power of the courts to hear cases rather than the scope of the securities laws. He said in a memo that Congress may have to amend the law.
Conway’s adversary in the Supreme Court case, Thomas Dubbs of Labaton Sucharow, said that the Morrison ruling won’t necessarily mean rejection of all F-cubed claims under federal law and that some investors will be able to sue under state or foreign law.
“It is not clear if the Morrison decision is as draconian a rule as some defendants might think,” Dubbs said.
Defense lawyers read the decision as a sweeping one that will thwart efforts by plaintiffs’ lawyers to sue foreign corporations.
“There may still be cases around the margins, one-off type cases involving face-to-face transactions or other odd circumstances,” said Jordan Eth, a lawyer at Morrison & Foerster who represents Infineon. “But the bread-and-butter, F-cubed cottage industry that developed is no longer.”