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

Date01 April 2022
AuthorJ.R. O'Sullivan
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 domesticsection 10(b) claims
from foreclosed extraterritorialsuits. 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 exchangesor 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 framingthat 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 TRANSACTIONTEST FOR DETERMINING THE SCOPE OF
SECTION 10(B) ACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
A. Morrison . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239
B. The Court’s Transactional Test for DomesticityTransactions
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 Statesis 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
focusanalysis for determining what constitutes a cognizable domesticcase 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 exchangesor 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 focusanalysis 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, 104649 (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 26970 (The transactional test we have
adoptedwhether the purchase or sale is made in the United States, or involves a security listed on a domestic
exchangemeets 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

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