Court of Appeals Rejects “Listing Theory” as Basis for Extending Reach of Securities Laws to Actions to Injuries Allegedly Suffered in Purchase of Non-U.S. Securities on Non-U.S. Exchanges

The World in U.S. Courts: Summer 2014 - Securities Law

City of Pontiac Policemen’s and Firemen’s Retirement System v. UBS AG, U.S. Court of Appeals for the Second Circuit, May 6, 2014

Various plaintiffs based in the U.S. and in other countries filed class action litigation against UBS and other corporate and individual defendants arguing that the sale of UBS shares in Europe violated U.S. securities laws because of failures to disclose to purchasers potential U.S. civil and criminal liabilities. Among other issues, the U.S. Court of Appeals in New York considered whether the securities laws could reach alleged misstatements made in connection with stock issued and sold on exchanges outside the U.S., given that the shares were also traded on the New York Stock Exchange.

A 2010 decision of the U.S. Supreme Court (Morrison v. National Australia Bank Ltd.) had established that the basic antifraud provision of the U.S. securities laws did not apply to the sale of such securities where they were not traded on a U.S. exchange. This case considered, for the first time, whether the fact that the securities were simultaneously traded in the U.S. would lead to a different result, under the so-called “Listing Theory.” The Court of Appeals rejected the Listing Theory, and upheld dismissal of the case.

The Listing Theory was developed by plaintiffs following a statement in the Morrison decision that U.S. securities laws would apply where a stock was “listed on [U.S.] exchanges.” Plaintiffs had wanted that statement to be read broadly to establish a basis for liability whenever a security was traded on a U.S. exchange, whether or not the transaction giving rise to the claim otherwise had any connection with the U.S. The issue was presented with respect to the plaintiffs’ so-called “foreign cubed” claims brought by non-U.S. purchasers of non-U.S. securities that were traded on a non-U.S. exchange—here, one in Switzerland. The Court of Appeals rejected the Listing Theory, holding that that the Supreme Court had intended its reference to U.S. listing to be a “proxy” for claims having arisen from a U.S. transaction—the only basis for potential liability that existed.

Another plaintiff presented “foreign squared” claims: It was a U.S. entity that placed a “buy order” for non-U.S. securities that was filled on the Swiss exchange. The buyer relied on an alternative ground for U.S. jurisdiction stated in Morrison, namely, that injuries arose from the “purchase” of a security “in the United States.” The Supreme Court had explained further that a “purchase” would be deemed to have occurred in the U.S. where the parties incurred “irrevocable liability” to carry out the transaction within the United States or where title is passed within the United States. The Court of Appeals found that neither condition was met by the submission of a purchase order, citing prior precedent that the citizenship and residency of the purchaser party was not relevant to the inquiry.

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