Morrison v. National Australia Bank Ltd.: a clear statement rule or a confusing standard.

• Author: Marshall, Brett R.

1. Introduction II. Background A. The Scope of the Securities Exchange Act of 1934 B. The Antifraud Provisions of the Securities Exchange Act of 1934: Section 10(b) and Rule 10b-5 C. The Evolution of the Doctrine of Extraterritoriality D. The Law Before Morrison: Early Applications of Extraterritoriality to Section 10(b) and Rule 10b-5 1. The "Conduct" Test a. The Second, Fifth, and Seventh Circuit's Approach b. The D.C. Circuit's Approach c. The Third, Eighth, and Ninth Circuit's Approach 2. The "Effects" Test E. Morrison v. National Australia Bank Ltd III. Analysis A. The Court's Application of the Presumption Against Extraterritoriality Has Been Inconsistent B. Beneficial and Detrimental Consequences of Applying the Presumption to Section 10(b) 1. Deterrent Functions of Giving Section 10(b) Extraterritorial Application 2. International Comity and the Convergence of Securities Laws C. Congressional Response to Morrison IV. Recommendation A. A Purposive Approach to the 1934 Act 1. The Inaccuracies of Legislative Intent 2. The Merits of Legislative Purpose B. Amend Section 10(b) V. Conclusion I. INTRODUCTION

   It is difficult to overestimate the impact that the globalization of securities markets has had on legislative policy and judicial decision-making within the United States. Recently, globalization has raised difficult questions regarding when and to what extent U.S. securities laws will govern multinational securities markets. (1) In addition to legislative policy considerations, procedural, jurisdictional, and equitable considerations must be addressed. These concerns include whether the United States has subject matter jurisdiction, whether a U.S. court can obtain personal jurisdiction over foreign defendants, and whether U.S. courts can create and enforce fair and effective remedies. (2) These concerns--and other considerations (3) --present substantial challenges to the legislature and judiciary, who must determine whether U.S. securities laws have extraterritorial reach. Despite these challenges, courts have allowed extraterritorial reach of U.S. securities laws for more than 40 years. (4) Although there has been a four-decade tradition of allowing the extraterritorial reach of U.S. securities laws in the lower courts, with the recent decision in Morrison v. National Australia Bank Ltd., (5) the Supreme Court stands ready to prohibit such application absent clearly expressed intent to the contrary from Congress. However, Morrison provides more uncertainty than clarity about when U.S. courts should apply U.S. law abroad. The Court's presumption against extraterritoriality has not been consistent, and its reasons for applying--or not applying--the presumption have varied from one area of law to another. Although the Supreme Court in Morrison attempted to clarify that it would apply the presumption against extraterritoriality in the securities context, (6) its decision promotes uncertainty about the presumption's value and general application.

   Part II of this Note first provides a brief background of the historical circumstances surrounding the establishment of the securities laws framework and the antifraud provisions contained in Section 10(b) of the Securities Exchange Act of 1934 (1934 Act) and Securities and Exchange Commission (SEC) Rule 10b-5. Part II then discusses the early extraterritorial application of these laws by U.S. courts and introduces Morrison. (7) Next, Part III of this Note examines the facts and reasoning of the Court's holding in Morrison regarding the extraterritorial application of Section 10(b) and Rule 10b-5 in relation to the Court's prior application of the presumption to other areas of U.S. law. Finally, Part IV of this Note recommends that the Supreme Court consider the remedial purpose of the 1934 Act when deciding its extraterritorial application. In addition, Congress should amend the 1934 Act to include the legislature's intent for Section 10(b) to apply abroad.

2. BACKGROUND

   On Tuesday, October 29, 1929, the United States experienced a "country-wide collapse of open-market security values" when the stock market crashed. (8) In what the New York Times dubbed "the most disastrous trading day in the stock market's history," it reported that American securities had shrunk by approximately $14 billion, with $10 billion of those losses coming from securities traded on the New York Stock Exchange. (9) U.S. businesses and investors were not the only ones who lost their fortunes. (10) Thousands of individuals around the world were "financially crippled." (11) Following the 1929 stock market crash, securities values fell even further, (12) and by 1932, common stocks were worth only ten percent of their pre-crash value. (13) There was then, as there still is now, a struggle to determine the cause of the apparent anomaly that devastated the U.S. economy. (14) Although there is no consensus as to the cause of the 1929 crash, many investors feared at the time that the market crash and ensuing depression were the result of misconduct by bankers and stockbrokers and a lack of government oversight and regulation. (15)

   As a result of these fears, a majority of American investors lost confidence that the market would recover without some kind of government intervention. (16) In an attempt to restore public confidence, Congress held hearings to identify problems and establish solutions. (17) These hearings led to the passage of the Securities Act of 1933 (1933 Act) and the Securities Exchange Act of 1934.18 Since that time, these acts have become the principal laws governing the U.S. securities market. (19) While the 1933 Act deals primarily with the offering and sale of securities and the 1934 Act focuses on trading and regulation in the secondary markets, both prohibit fraudulent practices. (20) Although the SEC had economic analysis and regulation as its original goal, the agency abandoned its economic research capacity and functioned primarily to protect investors against fraud. (21) Even today, the SEC underscores its primary role as a protector of U.S. investors. (22)

   1. The Scope of the Securities Exchange Act of 1934

      The 1934 Act gave the SEC broad authority to "register, regulate, and oversee brokerage firms, transfer agents, clearing agencies as well as the nation's securities self-regulatory organizations (SROs)." (23) The 1934 Act also gave the SEC power to require periodic reporting of securities information by companies dealing in publically traded securities. (24) Finally, and perhaps most importantly, the 1934 Act identified and prohibited types of fraudulent conduct and gave the SEC disciplinary power to enforce the provisions of the 1934 Act. (25) The SEC has emphasized that it is "[f]irst and foremost ... a law enforcement agency." (26) The SEC annually files hundreds of civil actions against individuals and companies who violate securities laws. (27) The majority of American litigation involving the application of U.S. securities law is based in the antifraud provisions of the Securities Exchange Act of 1934. (28)

   2. The Antifraud Provisions of the Securities Exchange Act of 1934: Section 10(b) and Rule 10b-5

      The antifraud provisions of the 1934 Act are set forth in Section 10(b)29 and promulgated through SEC Rule 10b-5. (30) The SEC's primary purpose of protecting investors is embodied in these two provisions. (31) Although the purpose of the provisions is clear, the basis for extraterritorial application is not. (32) Thus, the extraterritorial application of the securities laws has been a matter of judicial interpretation, (33) and with few exceptions, the presumption against extraterritoriality has largely been absent from such interpretations. (34)

   3. The Evolution of the Doctrine of Extraterritoriality

      The Court first elaborated on the presumption against extraterritoriality in American Banana Co. v. United Fruit Co. (35) In American Banana, the Court had to decide whether the Sherman Antitrust Act applied to an American corporation's attempt to monopolize the Costa Rican banana trade. (36) In refusing to apply the Act, the Court held that "the general and almost universal rule is that the character of an act as lawful or unlawful must be determined wholly by the law of the country where the act is done." (37) The Court stated that when the construction of a statute is in doubt, "the statute as intended [should] be confined in its operation and effect to the territorial limits over which the lawmaker has general and legitimate power." (38) Thus, relying on the legislative intent of the statute, American Banana created a strong presumption against extraterritoriality. (39) In Blackmer v. United States, the Court stated that a plaintiff could overcome the strong presumption that American Banana created by showing that Congress expressed its intent that the statute apply abroad. (40) In Foley Bros. v. Filardo, the Court affirmed the Blackmer approach, holding that the presumption against extraterritoriality assumes that "Congress is primarily concerned with domestic conditions." (41) A plaintiff can overcome the presumption only by a showing of contrary intent. (42) The most recent elaboration of the presumption pre-Morrison comes from EEOC v. Arabian American Oil Co. (Aramco). (43) In Aramco, the Court granted certiorari to determine "whether Title VII applied extraterritorially to regulate employment practices of United States employers who employed United States citizens abroad." (44) In finding that Title VII did not apply extraterritorially, the Court stated the assumption that "Congress legislates against the backdrop of the presumption against extraterritoriality. Therefore, unless there is 'the affirmative intention of the Congress clearly expressed,' courts must presume it 'is primarily concerned with domestic conditions." (45) The Aramco court applied a two-part test to trigger the presumption. (46) First, the Court considered whether the...