UBS at 299 Park Ave. (WIki)
The ban on extraterritorial application of U.S. securities laws applies even to claims based on foreign shares that are cross-listed on an American exchange, the U.S. Court of Appeals for the Second Circuit said Tuesday.
Addressing a case of first impression, the circuit said the cross-listing of shares does not change the equation for the limitation on lawsuits imposed by the U.S. Supreme Court in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), even if the buy order is placed in the United States.
Plaintiffs lawyers had hoped to carve out an exception to the ban on lawsuits over stocks that are traded abroad. Instead, the ruling further limits investors from filing suits in the U.S. over foreign stock transactions.
Judges Jose Cabranes (See Profile), Peter Hall (See Profile) and Denny Chin (See Profile) upheld the dismissal of a putative class action in City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, 12-4355-cv.
Plaintiffs were foreign and domestic institutional investors in UBS “ordinary shares” between Aug. 13, 2003 and Feb. 23, 2009. They claim the shares lost value on the revelation that UBS overvalued $100 billion in residential mortgage-backed securities and collateralized debt obligations and was forced to take a massive write down on its portfolio.
Another set of plaintiffs was led by the Alaska Laborers-Employment Retirement Fund over a June 13, 2008 registered rights offering that allegedly made misleading statements about a tax fraud investigation in which UBS client advisors were entering the U.S. to help U.S. citizens evade their tax obligations.
The investigation ended in 2009, in a deferred prosecution agreement with the Department of Justice and the Internal Revenue Service: the bank paid a $780 million fine and admitted it conspired to defraud the IRS.
The lawsuits alleged violations of §§10(b) and 20(a) of Securities Exchange Act of 1934 and §§11,12(a)(2) and 15 of the Securities Act of 1933.
In 2011, Southern District Judge Richard Sullivan (See Profile) dismissed claims by investors who purchased UBS shares on foreign exchanges. In 2012, Sullivan dismissed the remaining claims brought under the Exchange Act for failure to plead the elements of fraud, and he dismissed the Alaska Laborers’ claims under the Securities Act for failure to allege a material misstatement and lack of statutory standing.
The plaintiffs appealed to the circuit, and oral arguments were delivered on Dec. 12, 2013 by Gregory Castaldo, partner at Kessler Topaz Meltzer & Check for the plaintiffs; Robert Giuffra, partner at Sullivan & Cromwell for the UBS defendant;, and Barry Ostrager, partner at Simpson Thacher & Bartlett for underwriter defendants that included J.P. Morgan Securities and DeutscheBank AG.
Writing for the court Tuesday, Cabranes said Morrison‘s bar on actions under §10(b) brought by foreign plaintiffs suing foreign defendants for misconduct in securities traded on foreign exchanges (or “Foreign Cubed” claims) applies to the “listing theory” of three of the institutional investor plaintiffs.
Another plaintiff, the Oregon Public Employees Board, (OPEB), placed a buy order for UBS shares in the U.S. that was later executed on a Swiss exchange. The employees board claimed that amounted to the purchase of a security in the U.S.
But Cabranes said the court has rejected the idea that the citizenship or residency of an entity affects the place where the transaction occurred.
“Accordingly, the fact that OPEB was a U.S. entity, does not affect whether the transaction was foreign or domestic,” he said. “Nor does the allegation that OPEB placed a buy order in the United States that was then executed on a foreign exchange, standing alone, establish that OPEB incurred irrevocable liability in the United States.”
The Alaska Laborers’ claimed the 2008 offering was false because it stated UBS complied with the laws, held its employees to the highest ethical standards, and that its wealth management division did not provide services to clients in the U.S.—all while UBS was engaged in a cross-border tax scheme.
Here, Cabranes said, “It is well established that general statements about reputation, integrity, and compliance with ethical norms are inactionable ‘puffery.’”
“This is especially true where, as here, the statements are explicitly aspirational, with qualifiers such as ‘aims to,’ ‘wants to,’ and ‘should,’” he said. “Plaintiffs’ claim that these statements were knowingly and verifiably false when made does not cure their generality.”
The Alaska Laborers also alleged that failing to disclose the tax scheme was a violation of Regulation S-K, Item 503c, which requires “a discussion of the most significant factors that make the offering speculative or risky.”
But Cabranes cited the understanding that “‘disclosure is not a rite of confession’ and companies do not have a duty ‘to disclose uncharged, unadjudicated wrongdoing.’”
Finally, Cabranes agreed with the dismissal of the claims brought under 10(b) of the Exchange Act based on statements UBS made about the mortgage-backed securities and the collateralized debt obligations.
UBS stated how avoiding “asset concentrations” was a “key pillar” of its risk management strategy, and it made other allegedly misleading statements as to its valuations of mortgage-related assets, the plaintiffs said.
Cabranes said they failed to “plausibly allege” that the reference to “asset concentrations” were materially misleading, a claim he said was “undercut” by specific disclosures the bank made about its accumulation of mortgage-related securities.
On the valuations of mortgage-related assets, Cabranes said the plaintiffs failed to adequately allege that the failure to write down the assets was reckless “or that their behavior represented an extreme departure from the ordinary standards of care.”
Ostrager said, “This is really important from a precedential point of view for issuers and underwriters, and I am highly confident it will be frequently referred to in subsequent securities litigation.”
Giuffra said, “After seven years of litigation, it’s gratifying to see this case end in a complete victory.”
Plaintiff attorneys did not return calls for comment.