Morrison, Tourre, and the Misguided Interpretation of Rule 10b-5 (Introduction)

When the SEC settled the suit against Goldman, the public and the press mostly lost interest. Also potentially lost was the opportunity to definitively determine what happened in connection with the sale of ABACUS 2007AC1, a synthetic CDO. 

But in fact the case continued against one Goldman employee, Fabrice Tourre. Rather than move closer to a decision on the merits, the case against Tourre is snarled in a dispute over the jurisdiction of US courts to hear the case.  Tourre has sought dismissal on the grounds that, after the Supreme Court’s decision in Morrison v. National Australia Bank, 130 S. Ct. 2869 (June 24, 2010), the SEC is impermissibly seeking to engage in an extraterritorial application of Rule 10b-5.

As we'll discuss, Morrison is not a well reasoned decision and may ultimately be in league with such decisions as Dirks and Chiarella.  Nonetheless, Morrison reflects the state of the law.  Unfortunately, the lower courts, rather than try to smooth out some of the rough edges of the decision have instead construed the case in a far broader fashion than even the Supreme Court intended.  The result has been a substantial narrowing of the application of Rule 10b-5, the creation of a broad incentive on the part of domestic and foreign companies to list on overseas stock markets (while delisting from the US markets), and a substantial reduction in protection against fraud even for US investors. 

We will discuss some of this in upcoming posts.  

For primary materials on SEC v. Tourre, go to the DU Corporate Governance web site.  For primary materials on Morrison v. NAB, including the many amicus briefs filed in the case, go to the DU Corporate Governance web site.