Last year, a jury in New York City decided one of the few securities class actions ever to go to trial. Lest anyone think that a jury verdict is ever the end of a piece of complex litigation, the Southern District of New York released a post-trial opinion last week. The opinion is worth reading for several reasons–one of the best being that it contains one of the few accounts of how a securities class trial actually gets conducted. But, in addition, it also provides a look into how international securities class actions will be treated going forward.
Back in 2003, the defendants had moved to dismiss the original Vivendi complaint because–they argued–the federal court lacked subject-matter jurisdiction over "foreign-cubed" class actions. The trial court denied the motion to dismiss, citing the Second Circuit’s well-settled "conduct and effects" test.
So the case proceeded through certification to trial, where the jury rendered a verdict against Vivendi. Once the trial was conducted, the defendants moved for reconsideration of both the foreign plaintiffs’ claims and the claims of various American buyers in light of the Supreme Court’s decision in Morrison v. Australia National Bank, which prohibits "foreign-cubed" class actions. The plaintiffs opposed, arguing that due to some technicalities of SEC registration, all of Vivendi’s shares had been "listed" on the New York Stock Exchange, even though many of those shares had not traded there. While the trial court sympathized with plaintiffs’ position (it discussed in depth how the Supreme Court’s opinion was not as clear as it could be), it found a "technical flaw" with their argument:
It is true that the registration of any shares under Section 12 of the Exchange Act extends registration to the entire class of securities. And when a foreign company registers ADRs with the SEC, it must also register the underlying ordinary shares, necessarily resulting in the registration with the SEC of all ordinary shares. But registration with the SEC is not the same as listing (registering) on an exchange. The sample NYSE listing application provided to the Court at argument indicates that only a discrete number of ordinary shares are listed; this being the number of ordinary shares needed to back-up the ADRs being listed. Thus while all ordinary shares of a foreign issuer are deemed to be registered with the SEC, a lesser fixed amount of shares are actually listed with the Exchange. And ordinary shares that are not listed on an exchange (for any purpose) would fall outside plaintiffs’ literalist reading of the Morrison bright-line test as well as the underlying language of Section 10(b).
(Emphasis added.) The court also found that
Though the Supreme Court in Morrison did not explicitly define the phrase "domestic transactions," there can be little doubt that the phrase was intended to be a reference to the location of the transaction, not to the location of the purchaser and that the Supreme Court clearly sought to bar claims based on purchases and sales of foreign securities on foreign exchanges, even though the purchasers were American.
(Emphasis in original.) As a result, it dismissed the claims of all class members–foreign or American–who bought ordinary shares. So what can we learn from this ruling?
* Plaintiffs will not take adverse Supreme Court rulings lying down.
* In a class trial, it is always worth preserving all issues, no matter how often one loses them.