In re Alstom SA Securities Litigation: The Implications of Morrison

Last term, the Supreme Court addressed the extraterritorial application of Rule 10b-5 in Morrison v. National Australia Bank, Ltd., 130 S.Ct. 2069 (2010).  The Court essentially held that there was no extraterritorial jurisdiction.  Cases could only be brought if they involved "transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."  Id. at 2884.

The issue came up in In re Alstom SA Securities Litigation, 2010 U.S. Dist. LEXIS 98242 (S.D.N.Y. Sept. 14, 2010).  The parties raised two issues.  First, the defendants questioned whether the securities fraud claims of the putative class in the case, including purchasers of securities on a French stock exchange, remained viable after the United States Supreme Court’s decision in Morrison v. National Australian Bank, 2869, 2010 WL 2518523 (U.S. June 24, 2010).  Second, the lead plaintiffs questioned whether, pursuant to the Supreme Court decision in Merck & Co. v. Reynolds, 130 S. Ct. 1784 (2010), the court should reconsider its ruling at the Rule 12(b)(6) stage dismissing certain claims as time-barred.

Lead plaintiffs, the State Universities Retirement System of Illinois, the Louisiana State Employees' Retirement System, the West Virginia Investment Management Board, and the International Brotherhood of Electrical Workers Local 269 (collectively, “Plaintiffs”), brought this putative class action alleging that Alstom SA (“Alstom”), Alstom USA, Inc., Alstom Transportation Inc., Pierre Bilger, and Francois Newey (collectively, “Defendants”) violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (“§ 10(b)” and “§ 20(a)”).  

Plaintiffs, who were purchasers of Alstom's equity securities, alleged that the Defendants artificially inflated the price of Alstom's securities by making materially false and misleading statements.  Plaintiffs characterized the class as including investors who purchased Alstom securities (1) in the form of American depository receipts on the New York Stock Exchange (“NYSE”); (2) directly from Alstom; and (3) on the Premier Marche of Euronext Paris, a foreign stock exchange. 

Morrison held that § 10(b) applies to “only … [1] the purchase or sale of a security listed on an American stock exchange, and [2] the purchase or sale of any other security in the United States.”  In light of this holding, the court in Alstom directed Plaintiffs to show cause why “the claims of plaintiffs who purchased securities on foreign exchanges should not be dismissed.” 

First, Plaintiffs argued that since the buyers initiated the purchases of Alstom securities recorded on Euronext in the United States, they were domestic transactions under Morrison. 

Second, Plaintiffs argued that the Euronext transactions satisfied the Morrison rule that the federal securities fraud laws apply to transactions in securities “listed on a domestic exchange” because the common shares were registered and listed on the NYSE, even though they were not actually purchased there. 

The court did not agree.  With respect to the first argument, it was not enough that the transactions were initiated in the United States. 

• In essence, Plaintiffs would exclude from operation of the new test transactions in securities traded only on exchanges abroad if the purchase or sale involves American parties, or if some aspects or contacts of such foreign transactions occur in the United States. But insofar as this proposition superimposes an exclusion based strictly on the American connection of the purchaser or seller, it simply amounts to a restoration of the core element of the effect test. Similarly, to carve out of the new rule a purchase or sale of securities on a foreign exchange because some acts that ultimately result in the execution of the transaction abroad take place in the United States amounts to nothing more than the reinstatement of the conduct test.

Id. (quoting Cornwell v. Credit Suisse Group, 2010 US Dist. Lexis 76543 (S.D.N.Y. July 27, 2010).    

The court likewise rejected the assertion that shares listed on a US exchange were subject to Rule 10b-5 even though the actual purchases occurred elsewhere. 

• Plaintiffs' second argument presents a selective and overly-technical reading of Morrison that ignores the larger point of the decision. Though isolated clauses of the opinion may be read as requiring only that a security be "listed" on a domestic exchange for its purchase anywhere in the world to be cognizable under the federal securities laws, those excerpts read in total context compel the opposite result.

As a result, the antifraud provision did "not encompass purchases and sales of covered securities that occur outside of the United States."

Plaintiffs contended that if foreign-exchange transactions were no longer part of the action, then the Court should exercise supplemental jurisdiction over these claims and apply French law to adjudicate them.  The court rejected this argument, stating that to do what Plaintiffs asked would essentially restart substantial portions of the seven-year-old litigation.  Accordingly, the court dismissed the claims of Plaintiffs who purchased securities on foreign exchanges. 

Finally, the court addressed the Plaintiffs’ request that the court reconsider the dismissal of some of Plaintiffs' claims as time-barred.  Plaintiffs grounded their request on the Supreme Court’s decision in Merck & Co. v. Reynolds, which considered the functioning of the statute of limitations for § 10(b) claims.  The court directed Plaintiffs to address Merck & Co.’s applicability to their case as part of their imminent dispositive motions. 

The primary materials for this case may be found on the DU Corporate Governance website.