The government's power to bring transnational securities fraudsters to account: dodd-frank rendered Morrison irrelevant

• Author: J.R. O'Sullivan
• Pages: 231-292

ARTICLE

THE GOVERNMENT’S POWER TO BRING TRANSNATIONAL

SECURITIES FRAUDSTERS TO ACCOUNT: DODD-FRANK

RENDERED MORRISON IRRELEVANT

J.R. O’Sullivan*

ABSTRACT

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 deter-

mined 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 strug-

gled 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 con-

gressional 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

* © 2022, J.R. O’Sullivan.

231

majority of commentators believe that Congress’s effort to replace the transac-

tions 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 concomi-

tant 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 analy-

sis, 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 princi-

ples 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.

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233

I. MORRISON AND ITS “TRANSACTION” TEST FOR DETERMINING THE SCOPE OF

SECTION 10(B) ACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

A. Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239

B. The Court’s Transactional Test for Domesticity—Transactions

Involving “The Purchase or Sale of a Security Listed on an

American Stock Exchange, and the Purchase or Sale of any

Other Security in the United States”—is Flawed . . . . . . . . . . . 247

1. Prong One Is Predictable but Arbitrary in Its Allocation of

Causes of Action and Does Not Efficiently Serve

Congressional Aims in Securities Regulation. . . . . . . . . . . 247

2. Prong Two Is Unpredictable and Arbitrary and Does Not

Efficiently Serve Congressional Aims in Securities

Regulation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254

3. The Test’s Arbitrary Results Do Not Rationally Allocate

Regulatory Responsibility to the Sovereign with the Greatest

Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 261

II. DODD-FRANK SECTION 929P DISPLACES THE TRANSACTIONS TEST IN

GOVERNMENT-INITIATED SECTION 10(B) SUITS . . . . . . . . . . . . . . . . . . . 264

A. Congressional Enactment of Dodd-Frank Section 929P . . . . . . 265

B. Legislative History of Dodd-Frank Section 929P . . . . . . . . . . . 267

C. Implications of Legislative History: Dodd-Frank Section 929P is

Jurisdictional in Government-Initiated Cases. . . . . . . . . . . . . . 272

232 AMERICAN CRIMINAL LAW REVIEW [Vol. 59:231

D. Dodd-Frank Section 929P Provides for a Jurisdictional

Conduct-and-Effects Extraterritoriality Test in Government

Actions but No Extraterritorial Jurisdiction in Private Actions . 274

1. Did This Jurisdictional Provision Amend the Substantive

Reach of Section 10(b)? (No) . . . . . . . . . . . . . . . . . . . . . . 275

2. Did Congress Create a Jurisdictional Conduct-and-Effects

Test in Government-Initiated Cases, Leaving Courts Without

Jurisdiction to Entertain Privately Initiated Extraterritorial

Cases? (Yes) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 291

INTRODUCTION

The headline to emerge from the Supreme Court’s blockbuster decision in

Morrison v. National Australia Bank

1

was that, applying a reinvigorated presump-

tion against extraterritoriality,

2

the Court reversed forty years of courts of appeals

precedent in ruling that section 10(b) of the Securities and Exchange Act of 1934

3

does not apply outside U.S. territory. This Article focuses on the second, and most

practically consequential, part of the Morrison analysis: The Court’s newly forged

“focus” analysis for determining what constitutes a cognizable “domestic” case as

opposed to an action that is foreclosed because it represents an “extraterritorial”

application of section 10(b). Applying this analysis, the Morrison Court deter-

mined 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.”

4

Morrison’s second ruling has inexplicably attracted 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 demon-

strates that the Morrison transactions test is not, in practice, capable of meeting the

two ends the Court identified in crafting it: providing rational and bright-line rules

for determining which transnational causes of action serve Congress’s goals in

1. 561 U.S. 247 (2010).

2. See Julie Rose O’Sullivan, The Extraterritorial Application of Federal Criminal Statutes: Analytical

Roadmap, Normative Conclusions, and a Plea to Congress for Direction, 106 GEO. L.J. 1021, 1046–49 (2018)

(demonstrating that the Court had not applied the presumption with any consistency until Morrison).

3. 15 U.S.C. § 78j(b).

4. Morrison, 561 U.S. at 267 (emphasis added); see also id. at 269–70 (“The transactional test we have

adopted—whether the purchase or sale is made in the United States, or involves a security listed on a domestic

exchange—meets that requirement.”); id. at 273 (“Section 10(b) reaches the use of a manipulative or deceptive

device or contrivance only in connection with the purchase or sale of a security listed on an American stock

exchange, and the purchase or sale of any other security in the United States.”).

2022] DODD-FRANK RENDERED MORRISON IRRELEVANT 233