11 February 2011
On January 11, 2011, Judge Deborah Batts of the Southern District of New York dismissed Section 10(b) and Rule 10b-5 claims brought by a putative class of US plaintiffs against Royal Bank of Scotland (RBS) and several underwriters and individuals. The claims related to securities transactions that occurred in the United Kingdom and on other markets outside the United States.
The dismissal in In re Royal Bank of Scotland Group PLC Securities Litigation, 09 Civ. 300 (S.D.N.Y. Jan. 11, 2011), was based on the US Supreme Court’s decision in Morrison v. NAB, which held that the US antifraud securities laws apply only to transactions in securities listed on US domestic exchanges and to US domestic transactions in other securities. The RBS decision is significant because it rejected attempts by plaintiffs to circumvent Morrison by arguing that there was a sufficient US nexus for the court to hear their claims because (i) plaintiffs are US residents, (ii) plaintiffs made their decision to purchase RBS securities in the United States and (iii) RBS listed certain other securities, not at issue in plaintiffs’ suit, in the United States.
Facts Alleged in the Amended Complaint
Plaintiff-investors, who had purchased shares of RBS on the UK and Euronext Amsterdam markets, alleged that they suffered massive losses in shareholder value as a result of a series of write-downs that occurred due to RBS’s substantial holdings in subprime and other mortgage-related assets. They further alleged that between 2006 and 2007, RBS maintained in public statements and securities filings, including SEC filings, that it had no significant exposure to the subprime loan market and that its risk management practices and financial controls were sound. According to the amended complaint, these statements were false and misleading because RBS had actually accumulated billions of pounds of risky subprime assets during this period. Moreover, in October 2007, RBS purchased 38 percent of ABN AMRO Group, which held portfolios of subprime loans. Plaintiffs additionally alleged that RBS downplayed the extent of its exposure, though, reporting just over $2 billion in losses in December 2007.
In April 2008, RBS announced a $11.6 billion asset write-down, one-third of which was attributable to subprime assets carried over from ABN AMRO. RBS simultaneously announced a $23.7 billion rights issue to increase the company’s capital base; the plaintiffs alleged that prior assurances that it was well capitalized were false. Plaintiffs further alleged that RBS’s failure to account accurately for goodwill it recorded in connection with the ABN AMRO acquisition induced investors to participate in the rights issue by overstating its balance sheet.
Finally, on January 19, 2009, RBS disclosed that due to the volume of subprime exposure that it had taken between 2005-2008 and the failure of the ABN AMRO acquisition, it would report a loss of $41.3 billion for 2008. Following this disclosure, RBS ordinary shares trading on U.K. markets lost more than 65 percent of their value, plummeting to $0.17 per share. The shares were once valued as high as $11.60 in March 2007.
The amended complaint alleges that RBS made public filings with the SEC that included certain of the foregoing alleged misrepresentations.
Following the Supreme Court’s decision in Morrison v. NAB, the district court in the RBS lawsuit ordered additional briefing on the motion to dismiss. Defendants argued that the federal securities claims should be dismissed in light of Morrison because the amended complaint did not allege that the RBS ordinary shares at issue were purchased or sold in the United States or on an American stock exchange.
Not surprisingly, the plaintiffs disagreed. They argued that the plain reading of Morrison requires that when some of a company’s securities are listed on an American stock exchange, courts have jurisdiction under Section 10(b) even if the plaintiffs purchased the security at issue on a non-US market. In other words, plaintiffs argued that any US listing provides the requisite US nexus under Morrison, thus requiring the application of Section 10(b) to all the shares of a US-listed company, regardless of where the shares are sold.
The district court sided with the defendants, finding that “the idea that a foreign company is subject to U.S. securities laws everywhere it conducts foreign transactions merely because it has ‘listed’ some securities in the United States is simply contrary to the spirit of Morrison.” Judge Batts focused her analysis on the Supreme Court’s concern regarding the “true territorial location” of the purchase or sale, and the particular securities exchange laws that governed that transaction.
Finally, plaintiffs argued that their case was distinguishable from Morrison because (i) their purchases allegedly occurred within the United States, (ii) the named plaintiffs were US residents and (iii) the decisions to purchase many of their RBS ordinary shares were made in the United States based on the direction of US-based asset managers.
The district court disagreed, however, ruling that Morrison foreclosed this type of analysis and that the Exchange Act simply does not reach conduct in this country related to purchases of securities on exchanges abroad. As the district court explained, “plaintiffs’ approach—that it is enough to allege that Plaintiffs are U.S. residents who were in the country when they decided to buy RBS shares—is exactly the type of analysis that Morrison seeks to prevent. The Morrison court did not reject the conducts and effects test formerly employed by the various Circuits to replace it with another difficult-to-employ, fact intensive test.”
According to BBC News and the Financial Times, the Financial Services Authority (FSA) has pledged to publish a report on its findings by the end of March 2011 regarding the regulatory and management failures that led to the bank’s 2009 government rescue.
The contours of the Supreme Court’s landmark decision in Morrison v. NAB continue to be litigated in the district courts.
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