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Applying Morrison, Second Circuit Rejects “Listing Theory” of U.S. Securities Liability and Bars “Foreign-Squared” Claims

05 September 2014

​In a May 6, 2014 opinion, the United States Court of Appeals for the Second Circuit held that the Supreme Court’s decision in Morrison v. National Australia Bank Ltd. precludes the bringing of securities law-based claims in the U.S. by purchasers of shares of a foreign private issuer on a non-U.S. stock exchange even if the same class of shares is cross-listed on a U.S. stock exchange and even if the purchasers are U.S. entities or residents who placed buy orders while located in the United States.

In City of Pontiac Policemen's and Firemen's Retirement System v. UBS AG, the Second Circuit upheld the dismissal of a class action against UBS, holding that the U.S. Supreme Court's landmark decision in Morrison v. National Australia Bank Ltd. precludes the bringing of claims in the U.S. under the U.S. Securities Exchange Act of 1934 (the Exchange Act) that arise from securities purchases made on non-U.S. exchanges even if the same class of shares is cross-listed on a U.S. exchange. 

The class action plaintiffs, a group of non-U.S. and U.S. institutional investors who purchased ordinary shares of UBS between 2003 and 2009, alleged that UBS made certain material misstatements in documents filed with the SEC. While plaintiffs purchased their UBS shares on non-U.S. stock exchanges, UBS shares were listed both on non-U.S. exchanges and on the NYSE. A subset of the plaintiff class consisted of U.S. purchasers of UBS shares who placed buy orders in the United States that were executed on non-U.S. exchanges (so-called “foreign-squared” plaintiffs).

The appeal required the court to decide whether the bar on extraterritorial application of the Exchange Act established in Morrison precludes claims arising out of purchases of securities of foreign private issuers purchased on non-U.S. exchanges even if the same class of shares is cross-listed on a U.S. domestic exchange. The plaintiffs noted that the Morrison holding purported not to bar claims relating to “transactions in securities listed on domestic exchanges” and “domestic transactions in other securities” and argued that, because UBS shares have a secondary listing on the NYSE, the Morrison bar simply didn’t apply.

The Second Circuit rejected this argument, which has become known as the “listing theory,” concluding that the Supreme Court’s decision in Morrison read in its totality precludes claims brought by purchasers of shares of a foreign private issuer on a non-U.S. exchange even if the same class of shares is cross-listed on a U.S. exchange. 

The “foreign-squared” plaintiffs also argued that because their buy orders were placed in the United States, the Morrison requirement of a “purchase… of [a] security in the United States” was satisfied.  The court, citing Morrison and earlier Second Circuit decisions, also barred claims brought under the “foreign squared” theory, ruling that the mere placement of a buy order in the United States does not standing alone satisfy the “incurrence of irrevocable liability” test established by Second Circuit precedent. ​