In a case of first impression, the Second Circuit Court of Appeals recently revisited the standard set forth in Morrison v. National Australia Bank Ltd.¹ regarding the bar on extraterritorial application of United States securities laws as it applies to claims stemming from foreign-issued securities purchased on foreign exchanges but cross-listed on domestic exchanges. In City of Pontiac Policemen's & Firemen's Retirement System v. UBS AG,² a putative class action, plaintiffs, domestic and foreign institutional investors, brought claims under Sections 10(b) and 20(a) of the Securities Exchange Act against defendants, UBS AG and several UBS directors and officers.³ Between 2003 and 2009, plaintiffs had purchased "ordinary shares" of UBS listed on the New York Stock Exchange as well as several foreign exchanges.⁴ In addition, plaintiff Alaska Laborers-Employers Retirement Fund (Alaska Laborers) brought claims under Sections 11, 12(a)(2), and 15 of the Securities Act.⁵

Plaintiffs' contentions involved allegedly fraudulent statements made by UBS regarding (1) its mortgage-related assets portfolio and (2) its compliance with U.S. tax and securities law.⁶ Regarding the former, plaintiffs alleged that UBS accumulated $100 million in residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO), overvalued them, and failed to disclose this accumulation to shareholders.⁷ Additionally, UBS concealed the scope of the investment bank portfolio that these assets were a part of and, as the subprime market collapsed in 2007, UBS failed to revalue the mortgage-related assets, effectively concealing the portfolio losses.⁸ Regarding the latter, plaintiffs alleged that UBS had made materially misleading statements in connection with a scheme where UBS Swiss bankers traveled in and out of the United States and illegally advised Americans on investment purchasing.⁹

The district court had granted the UBS defendants' 12(b)(6) motion to dismiss all claims; after a de novo review, the appellate court affirmed the district court's decision.10 Perhaps most importantly, upon application of the extraterritorial bar in Morrison, the court found that the purchases at issue in this case were not within the purview of U.S. securities laws.

In reaching this conclusion, the court dissected the rule proclaimed in Morrison that "10(b) only provide[s] a private cause of action arising out of '[1] transactions in securities listed on domestic exchanges, and [2] domestic transactions in other securities.'"¹¹ The court ultimately determined that Morrison's focus on domestic purchases and sales meant that the key to proper 10(b) application was location of transaction—not location of exchange.¹²Thus, the court determined that a transaction involving a foreign purchaser of foreign-issued shares on a foreign exchange does not come within the purview of 10(b) and Morrisonregardless of its additional presence on a domestic exchange.¹³

In addition, the court was called to decide whether or not a purchase of foreign-issued shares made on a foreign exchange is considered "domestic" within the meaning of Morrisonsimply because the buy order was initiated in the United States by a domestic entity (here, plaintiff Oregon Public Employees Board).¹⁴ In determining that such a transaction was not "domestic," the court utilized the principle that "[a] securities transaction is domestic [for purposes of Morrison's second prong] when the parties incur irrevocable liability to carry out the transaction within the United States or when title is passed within the United States" to conclude that neither the fact that the buy order was executed domestically, nor the fact that the purchaser is a U.S. entity, are enough to classify the transaction as "domestic."¹⁵

After deciding the novel issues above, the court affirmed the district court's dismissal of Alaska Laborers' claims under Sections 11 and 12(a)(2) of the Securities Act for failure to plead any misstatements by UBS that gave rise to a cause of action.¹⁶ In addition, the court dismissed all remaining claims under Section 10(b) of the Securities Exchange Act.¹⁷ In doing so, the court determined that plaintiffs had not properly alleged (1) that UBS was consciously reckless or materially misleading regarding its asset concentration and corresponding risk diversification representations; (2) that UBS' valuation and disclosures of the mortgage-related assets were reckless; and (3) that UBS offered material misstatements related to tax fraud.¹⁸

_{1 561 U.S. 247 (2010).}

_{2 752 F.3d 173 (2d Cir. 2014).} 

_{3 Id. at 176–77.} 

_{4 Id. at 177.}

_5 Id.

_6 Id.

_7 Id. 

_{8 Id. at 178.} 

_9 Id. 

_{10 Id. at 178–79.} 

_{11 Id. at 179 (quoting Morrison, 561 U.S. at 267).} 

_{12 Id. at 180.}

_{13 Id. at 181.} 

_14 Id. 

_{15 Id. at 181–82 (quoting Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68 (2d Cir. 2012)).} 

_{16 Id. at 184.} 

_{17 Id. at 186-88.} 

_18 Id.