A massive securities class action against UBS AG finally bit the dust on Tuesday, courtesy of an appeals court decision that further limits the extraterritorial reach of federal securities laws.
In a 31-page ruling, the U.S. Court of Appeals for the Second Circuit ruled that a coalition of UBS shareholders can’t sue the bank over a wide range of alleged misconduct. In tossing the case, the Second Circuit rejected a theory plaintiffs have invoked in hopes of circumventing the U.S. Supreme Court’s 2010 decision in Morrison v. National Australia Bank, which held that U.S. securities law doesn’t extend to overseas transactions.
Beginning in 2007, UBS wrote down $48 billion in losses from investing in mortgage-backed securities. In early 2009, the bank also admitted that one of its units advised clients on ways to avoid U.S. taxes. A quartet of plaintiffs firms—Grant & Eisenhofer; Kessler Topaz Meltzer & Check; Motley Rice; and Robbins Geller Rudman & Dowd—strung these developments into a securities class action before U.S. District Judge Richard Sullivan in Manhattan. The plaintiffs pegged potential damages as high as $100 billion.
Then came Morrison, which has wreaked havoc on a wide range of cases targeting foreign conduct. The ruling spelled immediate trouble for the UBS plaintiffs, because they bought their shares in the bank on foreign stock exchanges. But the plaintiffs argued that their claims should survive because their UBS shares were cross-listed on U.S. exchanges.
Siding with UBS’ lawyers at Sullivan & Cromwell, Judge Sullivan called that argument a “strained” interpretation of Morrison and dismissed the case in 2012. We named UBS lead counsel Robert Giuffra Jr. of Sullivan & Cromwell our Litigator of the Week for the win.
The Second Circuit affirmed Sullivan’s ruling on Tuesday, concluding that “Morrison does not support the application of § 10(b) of the Exchange Act to claims by a foreign purchaser of foreign‐issued shares on a foreign exchange simply because those shares are also listed on a domestic exchange.” The panel also addressed the merits of the underlying claims that UBS hid from investors that it was facilitating tax evasion by U.S. citizens and making risky bets on mortgage-backed securities. All of UBS’ disclosures of MBS risk were adequate, the court ruled, and the bank had no obligation to disclose more details about the tax evasion scheme.
In addition to knocking out claims against UBS, the ruling also clears six financial institutions that underwrote a UBS stock offering: JPMorgan Chase & Co., Morgan Stanley & Co. International plc, BNP Paribas, Goldman Sachs International, Credit Suisse AG and Deutsche Bank AG. Those defendants were accused of misleading investors by vouching for UBS’ high ethical standards.
The decision comes after a star-studded oral argument in December 2013. Giuffra argued for UBS, while Barry Ostrager of Simpson Thacher & Bartlett argued for the underwriter defendants. Gregory Castaldo of Kessler Topaz argued for the plaintiffs, a group of pension funds from the U.S. and Europe. The case drew several amicus briefs, including one filed on behalf of the U.K. government by George Conway III of Wachtell Lipton Rosen & Katz, the lawyer who successfully argued Morrison at the Supreme Court.
Giuffra and Ostrager both told us that the Second Circuit’s decision is sure to be widely cited. “After seven years of litigation, it’s gratifying to see this case end in a complete victory,” Giuffra wrote in an email.
Kessler Topaz’s Castaldo didn’t immediately return a call seeking comment.