The Supreme Court’s attempt to limit the extraterritorial application of the Securities Exchange Act of 1934 (34 Act) in Morrison v. National Australia Bank may have backfired. Justice Antonin Scalia’s opinion for the majority critiqued decades of vague and unwarranted “extraterritorial” application of the act and set forth a new test. Attempting to limit the number of securities lawsuits brought by foreign investors in the United States, the court concluded that section 10(b) of the act never applies extraterritorially; it applies “only to transactions in securities listed in domestic exchanges, and domestic transactions in securities.”

Unfortunately, the court did not explain the meaning of “domestic transactions in securities.” Several courts have seized on this ambiguity and have essentially undone the intent behind Morrison by creating various conflicting applications of the transactional test. The U.S. Court of Appeals for the Second and Eleventh circuits, in particular, have held that the only relevant factor for determining whether section 10(b) of the act applies is whether securities were exchanged or transferred on United States soil.

This result is a far broader application of the act than Scalia ever intended. In sum, applications of Morrison have expanded the extraterritorial application of the act and fostered the very thing that the court hoped to extinguish—a “Shangri-La of class-action [securities] litigation.”


Pre-Morrison courts reasoned that Congress could not have intended the 34 Act to condone fraudulent conduct involving the United States. Consequently, courts applied the conduct and effects tests to determine the extraterritorial reach of the 34 Act.

Under the conduct test, courts limited the application of the 34 Act to domestic conduct directly related to the perpetration of a fraudulent scheme abroad. They applied the 34 Act extraterritorially in three scenarios: (a) the principal or “master” fraud to sell securities abroad occurred in the United States; (b) most of the preparation for the fraudulent offering of a United States issuer’s securities abroad occurred in the United States; or (c) the United States served as a “base of operations” for meetings, conferences, or receipt of bank accounts from foreign investors.2

Under the effects test, acts “done outside a jurisdiction, but intended to produce and producing detrimental effects within it, justif[ied] a state punishing the cause of the harm as if [it] had been present at the effect….”3 Courts applied the 34 Act under the effects test when acts done abroad directly injured domestic groups, such as: (a) investors resident in the United States; (b) securities traded on a domestic exchange or otherwise issued by a United States entity; or (c) domestic markets, at least where a reasonably particularized harm occurred.4

Courts often disagreed as to how much domestic conduct warranted the 34 Act’s extraterritorial application.5 The Supreme Court ended the debate by overruling the conduct and effects tests in Morrison.


Morrison was a “foreign-cubed” securities class action—it was (a) brought by foreign plaintiffs (b) suing a foreign securities issuer in the United States for violating United States securities laws (c) based on foreign transactions. National Australian Bank traded its common stock on foreign exchanges. National’s only connection to the United States was its mortgage-servicing company stationed in Florida. Plaintiffs, foreign investors, sued National and others, claiming that National fraudulently manipulated its mortgage-servicing company’s financial models to inflate artificially the value of its securities.6

The district court dismissed the complaint for lack of subject matter jurisdiction because all of the domestic acts were too tenuously connected to a “securities fraud scheme that culminated abroad.”7 The Second Circuit affirmed, finding that domestic acts did not “compris[e] the heart of the alleged fraud,” and rejected National’s call for a bright-line rule establishing the 34 Act’s extraterritorial application.8 The court was “leery of rigid bright-line rules because [it could not] anticipate all the circumstances in which the ingenuity of those inclined to violate the securities laws should result in their being subject to American jurisdiction….”9 The Supreme Court disagreed.

The Transactional Test. Relying on the presumption that legislation never applies extraterritorially unless expressly stated, the court overruled the long-standing conduct and effects tests as vague and conflicting, reasoning that there “is no more damning indictment of [these] tests than the Second Circuit’s own declaration that ‘the presence or absence of any single factor which was considered significant in other cases…is not necessarily dispositive in future cases.’”10

The court’s new bright-line test limits extraterritorial application of the 34 Act to the following two situations: “the purchase or sale of a security listed on [a United States] stock exchange” (first prong); and “the purchase or sale of any other security in the [United States]” (second prong).11 The court rejected other proposed standards, reasoning that the bright-line transactional test sufficiently addressed relevant international law policies: “While there is no reason to believe that the [United States] has become a Barbary Coast for those perpetrating frauds on foreign securities markets, some fear that it has become a Shangri-La of class-action litigation for lawyers representing those allegedly cheated in foreign securities markets.”12

The Aftermath

Concurring, Justice John Paul Stevens cautioned that “while the clarity of the court’s test may have some salutary consequences, like all bright-line rules it also has drawbacks.”13 As discussed below, his statement was prophetic.

Consistent Application of the First Prong. Courts generally agree that securities transactions must occur within the United States to trigger application of the 34 Act.14 An investor does not have a private right of action merely because a company’s securities are “listed” on a United States exchange; rather, the investor must also purchase the company’s securities in a domestic exchange.15

Courts generally agree that American Depository Receipts (ADRs) traded on domestic exchanges are subject to the 34 Act.16 Nevertheless, the Southern District of New York in Société Générale held that the 34 Act does not apply to ADRs traded over-the-counter because such sales are “predominantly foreign securities transactions.”17 Although Morrison did not address the sale of ADRs directly,18 the transactional test appears to suggest that “other securities” traded domestically fall within the scope of the 34 Act;19 however, Société Générale casts doubt on the applicability of the first prong to off-exchange ADRs.

Inconsistent Application of the Second Prong. The perceived ambiguity of the second prong—”the purchase or sale of any other security in the [United States]“20—has resulted in three potentially inconsistent approaches.

The first approach considers whether either the offer or acceptance of the off-exchange transaction occurred within the United States.21 For example, the Southern District of Ohio relied on Morrison to interpret the extraterritorial reach of a blue sky law as applying to the state where the offer, acceptance, or purchase of a security is made, holding that the court should analyze the transaction to determine where and when the critical steps of the transaction occurred.22

Defendant in that case, a Delaware corporation, sold notes to plaintiffs in New York.23 Because no part of the transaction occurred in Ohio, the court denied extraterritorial application of the blue sky law under Morrison and constitutional grounds.24 Likewise, the Central District of California appears to suggest that solicitations and subsequent purchases in the United States may satisfy the second prong of the transactional test.25 Ironically, this approach seems more consistent with the conduct test rejected in Morrison.

The second approach considers whether the parties agreed to be bound to each other in the United States.26 The Second Circuit has held that the “act of entering into a binding contract to purchase or sell securities” satisfies the second prong.27 The 34 Act applies when there is a “meeting of the minds” between parties. Otherwise, violators of the law could escape liability simply by avoiding an “ultimate execution” of the transaction.28

The final approach requires ultimate execution or “irrevocable liability” between the parties in the United States.29 It deems offers and even contracts merely “preparatory” under the conduct test, which Morrison rejected.30 For example, the Southern District of New York in Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc held the 34 Act inapplicable where a plaintiff did not plead an actual transfer of securities in the United States, but did allege that it negotiated and accepted a defendant’s offer to sell off-exchange securities in and transferred funds to New York.31 Thus, unlike the first and second approaches, the final approach requires actual transfer of securities in the United States to apply the 34 Act.32

Expansion of 34 Act Liability

Morrison attempted to end the erroneous extraterritorial application of the 34 Act. By failing to define the second prong, however, the court opened the door for lower courts to apply a far broader standard. Under the three approaches discussed above, virtually any securities transaction concluded anywhere in the United States creates a potential securities class action under the 34 Act.

When any of these approaches is applied to Morrison, it becomes clear that the lower courts’ applications of Morrison are inconsistent with the Supreme Court’s ruling and do not end extraterritorial application of the 34 Act. If National had hypothetically transferred its stocks to the investors in New York, for example, the 34 Act arguably would have applied under all three approaches. Ironically, under the prior conduct and effects tests, the same hypothetical would likely not have triggered the application of the 34 Act.33

Stevens and the Second Circuit warned that a bright-line test could create more problems than it resolved.34 Their warnings were prophetic but unheeded. The lower courts’ applications of the transactional test have led to a far wider application of the 34 Act than ever before. The Supreme Court has inadvertently buttressed the very thing that it set out to raze—a “Shangri-La of class-action [securities] litigation.”

John D. Roesser is a partner at Winston & Strawn. Louis A. Russo is an associate at the firm. Gianfranco J. Cuadra, also an associate at the firm, assisted in the preparation of this article.


1. Section 10(b) illegalizes fraudulent or deceptive conduct “in connection with the purchase or sale of any security.” 15 U.S.C. §78j(b) (2009).

2. See, e.g., SEC v. Berger, 322 F.3d 187, 193–94 (2d Cir. 2003) (applying 34 Act to U.S. resident who operated foreign investment company owned almost entirely by foreigners); Kauthar SDN BHD v. Sternberg, 149 F.3d 659, 666–67 (7th Cir. 1998) (applying 34 Act where U.S. was used as a base for fraudulent offering abroad); IIT v. Cornfeld, 619 F.2d 909, 917–20 (2d Cir. 1980) (applying 34 Act to overseas fraudulent offer by U.S. issuer where most critical efforts underlying the fraud occurred in the U.S.).

3. Schoenbaum v. Firstbrook, 405 F.2d 200, 206 (2d Cir. 1968) (quoting Strassheim v. Daily, 221 U.S. 280, 285 (1911)).

4. See, e.g., Mak v. Wocom Commodities Ltd., 112 F.3d 287, 290 (7th Cir. 1997); Consol. Gold Fields PLC v. Minorco, S.A., 871 F.2d 252, 261–63 (2d Cir.), amended on other grounds, 890 F.2d 569 (2d Cir. 1989); Des Brisay v. Goldfield Corp., 549 F.2d 133, 134–36 (9th Cir. 1977).

5. Compare, e.g., Cont’l Grain (Australia) Pty. Ltd. v. Pacific Oilseeds, Inc., 592 F.2d 409, 419–21 (8th Cir. 1979) (requiring “significant” activity within U.S. furthering fraud abroad) and Zeolsch v. Arthur Andersen & Co., 824 F.2d 27, 31 (D.C. Cir. 1987) (requiring conduct violating domestic securities laws) with Kauthar SDN BHD, 149 F.3d at 667; see also, e.g.,Psimenos v. E.F. Hutton & Co., 722 F.2d 1041, 1044–45 (2d Cir. 1983) (requiring “substantial” and “material” domestic conduct to apply 34 Act extraterritorially).

6. Morrison, 130 S. Ct. 2869, 2869, 2875–76.

7. In re National Australian Bank Secs. Lit., No. 03 Civ. 6537(BSJ), 2006 WL 3844465, at *8 (S.D.N.Y. Oct. 25, 2006).

8. 547 F.3d 167, 175–76 (2d Cir. 2008).

9. Id.

10. Morrison, 130 S. Ct. at 2877–79 (quoting IIT v. Cornfeld, 619 F.2d 909, 918 (2d Cir. 1980)).

11. Id. at 2888.

12. Id. at 2886.

13. Id. at 2895 (Stevens, J., concurring).

14. See, e.g., In re UBS Sec. Lit., No. 07-11225, 2011 WL 4059356, at *4–6 (S.D.N.Y. Sept. 13, 2011); SEC v. Compania Internacional Financiera S.A., No. 11–4904, 2011 WL 3251813, at *6 (S.D.N.Y. July 19, 2011) (explaining that Morrison “never states that a defendant must itself trade in securities listed on domestic exchanges or engage in other domestic transactions”).

15. In re Royal Bank of Scotland Group PLC Sec. Lit., 765 F.Supp.2d 327, 335–36 (S.D.N.Y. 2011).

16. See, e.g., In re Vivendi Universal, S.A. Sec. Lit., 765 F.Supp.2d 512, 527–29 (S.D.N.Y. 2011); Stackhouse v. Toyota Motor Co., No. 10–CV–0922, 2010 WL 3377409, at *1 (C.D. Cal. July 16, 2010).

17. In re Société Générale Sec. Lit., No. 08–2495, 2010 WL 3910286, at *6–7 (S.D.N.Y. Sept. 29, 2010).

18. See Morrison, 130 S. Ct. at 2876 n. 1.

19. Compare Société Générale Sec. Lit., No. 08–2495, 2010 WL 3910286, at *6–7 with Morrison 130 S. Ct. at 2888 and In re Vivendi Universal, 765 F.Supp.2d at 512 (considering ADR under first prong) and In re Royal Bank of Scotland, 765 F.Supp.2d at 327 (same) ; see also Hannah L. Buxbaum, “Remedies for Foreign Investors Under U.S. Federal Securities Law,” 75 LAW & CONTEMP. PROBS.??101, 107 (2012) (critiquing Société Générale as “difficult to square with the Morrison test”).

20. Morrison, 130 S. Ct. at 2888.

21. See generally In re Nat’l Century Fin. Enters., 755 F.Supp.2d 857, 882–84 (S.D. Ohio 2010).

22. Id. at 880 (citing A.S. Goldmen & Co. v. N.J. Bureau of Secs., 163 F.3d 780, 787 (3rd Cir. 1999)).

23. Id. at 862–63.

24. Id. at 882–83, 886.

25. Stackhouse, No. 10–CV–0922, 2010 WL 3377409, at *1 (summarizing two conflicting approaches under Morrison based on location of purchasers).

26. See generally Absolute Activist v. Ficeto, 677 F.3d 60; In re Optimal U.S. Lit., 813 F.Supp.2d 351 (S.D.N.Y. 2011).

27. Ficeto, 677 F.3d at 67 (emphasis added).

28. Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972).

29. See generally Quail Cruises Ship Mgmt. Ltd. v. Agencia de Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011); Basis Yield Alpha Fund (Master) v. Goldman Sachs Group, Inc., 798 F.Supp.2d 533, 537 (S.D.N.Y. 2011); Cascade Fund LLP v. Absolute Capital Mgmt. Holdings Ltd., No. 08–01381, 2011 WL 1211511, at *5–7 (D. Colo. Mar. 31, 2011).

30. Cascade Fund LLP, No. 08–01381, 2011 WL 1211511, at *6–7 (rejecting Stackhouse) ; see also Quail Cruises Ship Mgmt. Ltd., 645 F.3d at 1310–11 (requiring transfer of securities); S.E.C. v. Goldman Sachs & Co., 790 F.Supp.2d 147, 158–59 (S.D.N.Y. 2011) (rejecting “offer” as evidence of “purchase” because it is conduct under the test rejected in Morrison).

31. See Basis Yield Alpha Fund (Master), 798 F.Supp.2d at 534–36, 537.

32. Compare Ficeto, 677 F.3d at 67 (finding a binding contract sufficient for second prong) with Quail Cruises Ship Mgmt., 645 F.3d at 1310–11 (requiring actual closing, not simply agreements to close) and Basis Yield Alpha Fund (Master), 798 F.Supp.2d at 537 (finding agreement to purchase insufficient for second prong). Interestingly, the Second Circuit accepts both the second and third approaches. Ficeto, 677 F.3d at 67–68.

33. See supra notes 2–5.

34. 130 S. Ct. at 2895 (Stevens, J., concurring); 547 F.3d 167, 175–76.